now just is not conducive to this kind of thing happening. >> just as many people watching the game. steve, we'll see you in about 30 minutes. thanks so much for previewing that. steve liesman at goldman headquarters. that does it for us on this thursday. we'll see you tonight for the vice presidential debate, 8:00 p.m. eastern time. right now back to headquarters, wapner, and the fast money halftime. carl, thanks very much. welcome to a special edition of the halftime report. it's the issue on the minds of every american from wall street to main street. the looming fiscal cliff. what some call a ticking time bomb for the stock market. in less than 30 minutes, the two men at the heart of that debate, alan simpson and erskine bowles will join goldman sachs ceo lloyd blankfein for an exclusive interview with our own steve liesman. what's really at stake? can a deal be made? what will the fallout be if not? all those topics certainly to be covered today at the bottom of the hour. first let's hit the market. stocks attempting to snap back

after four down days. is the correction over? josh brown, can the rally resume? >> i'm not sure. this is not a great snapback. today we're looking at it already starting to fade. apple is really the focus for most traders. obviously a market leader is not acting well today after a pretty tumultuous week. the other thing i'd point out from a technical standpoint, 1430 becomes very important. horizontal support from the march and april highs at that level. plus it's the 50-day moving average. we're right there. i think a lot of people are just hanging loose and they'll wait and see. >> steve weiss, what started out as a pretty robust day is quickly leaking away here. >> yeah. what started out as somewhat of a positive outlook based upon spain getting closer to asking for a bailout with the downgrade yesterday. then you had claims that drove the market. to me we're going to see next week when we get in the heart of earnings season if, in fact, that earnings season has discounted, the market's

discounted that earnings season. yesterday that wasn't the case with cummins. i'm not so sure anymore based upon last week. i'd be cautious. somewhat net long but cautious. >> stephanie link, that's the question. has the market already factored in earnings? >> numbers have come down. guidance, the expectations have come down as well for the fourth quarter. we're going to have to listen here to what companies have to say. but i'd say we continue to see the u.s. slowly recovering. initial claims was a good data point today. then global easing. south korea and brazil lowered rates overnight. that's positive. not to mention china adding more stimulus early in the week. you still have the global fed at work. >> mike murphy, how about it? is the correction over? >> i don't know that it's over. it feels to me like the s&p wants to go down and touch that number we've been talking about, that -- josh said 1230. i'm around 1225. 1425, excuse me. it looks like the market wants to go down and test that. i think if it comes down, tests

that and holds, the rally resumes. >> all right. is the glass half full or half empty for the markets? john stoeltsfitz, chief investment strategist at oppenheimer. welcome to halftime. >> thanks for having me. >> do you have a sense as to whether the rally is set to resume or the correction is fwoing to continue? >> i think overall the rally is set to resume. i have to say in terms of a correction, i don't think we were anywhere headed near a 10% decline. i don't think we were looking for a correction here. if anything the market needs to pause and ponder. judge some of the earnings that come in as we go forward. so far it's mixed. >> has the market factored in earnings or not? >> i think the market is factoring in earnings. ahead of, it was. when we got into it, it realized first things were better than it expected. now it's thinking perhaps not as good as we expected. in the short term it's a pause and ponder. our target remains 1450 as a year end target. we've been through it so far. we expect to revisit that again.

looks good. >> you said, though, a moment ago that you saw the rally was set to resume. yet you're only looking for about 10, 15 points upside between now and the end of the year for the s&p. why? >> well, i tell you what. i think we could easily go through the 1450. then after the election, after the fiscal cliff issues are dealt with, what i think we're going to find is that the market will then pause and ponder again until we break out into the new year. >> john, your favorite -- it's josh brown. your favorite sectors, it would appear to be a pretty counterintuitive bet given that these are going to be the worst areas during this earnings season. you like materials, financials, discretionary and energy. four areas that i frankly would prefer to be underweight. could you tell us why that's a bet for you? >> okay. reason why it's a bet, i'm looking ahead for growth to reassert itself. when we get into next year. so i'm going to want to buy these areas on weakness in here. i don't want to chase them later on. i think materials looks like a

good play for 2013. we're going to see china is going to add plenty of support to its economy. add liquidity. stimulus. europe is going to keep progressing. the u.s. will prosper. >> steve weiss, you have a question. what's interesting, stoltzfus's top picks, leadership groups today. >> i'm going to hold your feet to the fire. to me over the next couple weeks there is only one issue. that is has the market discounted earnings. you seem to have equivocated on it. plus you have to have -- you have to believe that is the case if you're in materials. you can't say i'm going to wade into it. i'm looking to buy. they're not going to get much cheaper if that's your view. >> well, related to materials, i think the market is particularly tough on it. but i do think that moving forward, it's something you want to own. so why not start to own it now? as far as earnings on a broad basis, i think the market is --

i mean, is playing this as it comes towards it. >> john, good to have you on the show. thanks so much. >> thanks for having me. the biggest movers in the s&p right now. bertha coombs all over that. >> the biggest movers to the upside no surprise, scott, is sprint. confirming what david faber has been reporting all morning. it is in talks with softbank about a major investment. with the move today sprint hits a four-year high. it topped $6 for the first time in about four years. take a look at pcs. pcs today one of the big drags. now it looks like sprint won't need to make some sort of bid for pcs. clearwire and leap are two of the other wireless players moving right along in sympathy with sprint. their prospects some feel look a little better. i don't know what you guys think about that. >> let's ask stephanie link. do you guys own sprint? i can't remember. >> we don't own sprint. we're waiting for it to be under $5. >> good luck. >> absolutely. the way i would trade, i

certainly wouldn't chase it here today. i still like the tower guys, phone castle, amt. i also think at&t and verizon, they've been coming down on competition, the threat of new competition. watch for at&t below 35. i think that stock is very interesting. >> okay. on the way our top three trades. plus, health care stock picks depending on who wins the election. later, of course, our cnbc exclusive. it's less than 20 minutes away now. goldman sachs boss lloyd blankfein, alan simpson, erskine bowles. they'll join us live. discuss everything from the markets to, of course, the looming fiscal cliff. logon to futuresnow.cnbc.com 1:00 p.m. eastern time for our live streaming exclusive with representative ron paul. a must see ahead of tonight's vice presidential debate. "halftime" coming back in a few minutes.

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let's do our top three trades now. wall street likes what it's hearing from fedex. a number of firms up in price targets on that stock. mike murphy, you've been all over this one. >> judge, we've been on it. if you remember fedex guided the street lower about three weeks ago. at that time we talked about this analyst day they had the last two days. the cost savings they talked about, $1.7 billion, was may more than anyone was anticipating. the stock had a big rally. however, in two days the stock's up just about 10%. we're out of the position completely here. we look to re-enter back down around the 100-day. somewhere around the $86, $87 range. >> you have a few bucks to wait. coal names like alpha natch ra are soaring along with the price of nat gas today, steph. >> natural gas is actually up a little bit on the seasonal trade. you also have a 46% drop in the rig count year to date. so that's actually going to tighten the supplies. inventories are still 8% above five-year averages. it's been coming down steadily since march. you've got very easy comparisons

versus a year ago when you had the fourth largest winter on record. we've been buying southwest energy this morning. >> j.b., what's your read here? alpha natural with a sizable gain you're seeing today, about 14%, or nat gas here, 3.58. you're hearing predictions of four bucks, five bucks in the not too distant future. >> i've not been a huge fan of coal in general. alpha natural is actually the lowest ranked fundamentally in our universe as we look at these things. so if you have to be in this trade, you think it's got legs, i prefer kol. it found the bottom in june. not really rallied yet. it's been doing much better since romney started talking up coal. i would go there rather than a & r. i think really what we're seeing is a rally in a bear market. >> never one to hold back an opinion, weiss, you certainly have been vocal on caterpillar. cut today from sector perform to outperform at rbc. citing elevated inventories and

weakness in china and europe. weiss, you've been short this name if not in ownership of the stock certainly in how you viewed this one for a long time. >> yeah. you know what? i covered some of the short yesterday. but i am still short. the stock's still going lower. a few weeks ago they talked about 2015. what about this quarter? they missed the preannouncement. this is going lower. all their end markets are coming down. >> all right. in addition to the fiscal cliff, of course, health care will be in focus at tonight's vice presidential debate. what should you be listening for and how should you be trading those stocks as we get closer to the election? let's bring in sam eisley. welcome back. people are certainly placing their bets depending on how they think the election is going to go. what's your read on the space? >> first of all, respect to tonight's debate, it will be somewhat indicative of who's going to win the election. it's not going to be definitive in any way. there is a way to call that in the sense you can actually call

it invest. you could put money on the election through an exchange called intrade. >> we follow that closely. we sure do. >> right now barack obama is thought by most people who put money on it to be the winner. he's selling for #0 cen60 cents. romney for 40 cents. >> what are you picks? if you think the president is going to get re-elected where do you want to be in health care? >> if the president is re-elected the legislation he enacted a couple years ago will go into force in 2013, 2014. there are particular winners and lu losers in that. the big winner is hospital companies in our assessment. most of the sub sectors are generally not impacted too much. but a couple are. the hospital sector would be impacted because there'll be an extra 10% more users, insured people, 30 million people on a base of 300 that will pass through their doors. obama wins the election, biden

wins the debate, 60 cents on intrade. hospital companies do fine. most dramatically, hospital corporate of america, agency a, is the one most exposed. on the other side, on the other side, companies that would not benefit would be the private health insurance companies. so the health maintenance organizations such as united health and so on. they have suffered. they might suffer more when obama makes a clear win. on the other hand, if romney should win, they would come out all right. as would the medical device companies. because the medical device companies are facing a tax on their sales going into effect next year. there is possible legislation around to remove that tax. if romney wins, it's more likely it'll be removed. >> understood. sam, thanks. >> you're welcome. >> do you have a trade, josh brown? >> yeah. i think you go broad. i've been recommending x lv, sector play. it's getting realitily tough,

though, to find so-called cheap pharma stocks. up 22% year to date. one of the best sectors out there. it's getting a little bit slimmer. i still like the group overall. >> wonder what the dividend issue would be, weiss, if you're looking at some of those big pharma stocks, whether it's pfizer, merck, or some of these other names depending on -- >> yeah. absolutely. they are pretty hot. they've come down quite a bit from 5% and 6%. hmos, start shaving some of your holdings. >> these issues and many more will come up in tonight's vice presidential debate. cnbc begins special coverage of the debate at 7:00 p.m. eastern time. all right. still to come on "halftime," banking on earnings. what you need to know today before jpmorgan and wells release their new numbers tomorrow. also ahead, our cnbc exclusive. cnbc's steve liesman at goldman sachs headquarters counting down to our main event. looking forward to it. >> just a few minutes we have coming up an all star trifecta.

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welcome back to the "halftime report." over to david faber who has more developments on that sprint story. david? one of the key stories of the morning has been the reports we've been giving you that have been confirmed by sprint it's in talks with softbank of japan for softbank to acquire a control position in the company. sources close to the deal tell me that as a result of the leaks which first took place in the japanese media, the chances of the deal itself have been somewhat reduced. now it depends on who you talk to. those chances still seen as a bit better, i would say, consensuswise than 50/50. nonetheless, again, those chances they say have been reduced as a result of the leak. the hope, though, is still they can get through this period now that it is in the public realm and cobble together a deal that they would announce in the next week or two. i did want to get specifically back to an issue i had raised

earlier in my initial reports about clearwire and clarify something i reported incorrectly. softbank is not in talks to acquire clearwire. however, sprint, which already owns about 48%, 49% of the company, is in talks to do the same. to acquire clearwire as part of this deal. a very complex deal as you can see. softbank does have a need for sprint to have control of clearwire's board. it does appear that sprint is going about that by having discussions aimed at acquiring clearwire, which while it does own a lot of, does not own the majority of. some of which is still held by cable companies and the like including, of course, as well, some public shareholders. did want to clarify that when it comes to clearwire. finally, of course, we've seen shares of sprint pc -- excuse me. metro pcs down sharply today. i can tell you sprint did not consider a bid to come over the top in a deal that has been done between t-mobile and metro pcs

as had been reported by some other outlets last week. as i have been reporting, t-mobile was an important component of these talks when they first began this summer between both t-mobile and sprint. sprint very disappointed that t-mobile perhaps still traumatized from its failure to get acquired by at&t, chose to pull out of the talks because it was worried about government disapproval of any potential deal. they went their own way. scott, a lot of moving parts here. we'll see where it all ends up. of course, it still is talks that would aim at a roughly 70%-ish ownership by softbank in sprint. softbank been very successful in japan in terms of rolling out lte. back to you. >> thanks so much. david faber. a lot of movement today in those stocks. as well in the banks. they're in the green as investors wait for the first of this quarter's big earnings reports. jpmorgan and wells fargo will kick things off tomorrow morning before the bell. stephanie, you're long both names. what are you looking for? >> i'm a little nervous.

jpmorgan up 25% from last quarter. expectations are pretty high. i think we'll get some final resolution to close the door on london london whale. how bad is nim? what's their plan for capital allocation. wells fargo, you're going to get more color on housing. that's important, obviously. that's one of the reasons why we're overweight the banks at this point. what's also important for wells is their expense ratio. they have actually had problems in the past keeping their expenses in control. so i want to see if they can do that and see operating leverage. >> yojosh brown, what do you wah for in the banks in general which have had a darn good year? >> what we want to hear, what we want to see, i think, is this continuing pattern of housing improvement like stephanie said. wells fargo's not the only one. you can also look at u.s.

bancorp which has a decent sized window into that. the housing thing is going to be important. the only thing working right now besides autos in this economy. hopefully that continues. >> weiss, if it's all about housing, then wells fargo being one of the most important, what about citi? highly leveraged to the u.s. housing market. is that maybe the one? you guys haven't discussed it. that has the most upside at this point? >> i'm just not a big fan of citi because i'm not a huge fan of their management. i'm in b of a. i think that's got great upside. below book. cheaper on a book basis. stock's done well. i think you play any -- we heard jamie dimon talk about how he's not giving up on spain. the opportunities they're starting to mine over there from the reduced exposure of the european banks is going to be huge. go with multinationals with the best management. that continues to be jpmorgan. >> murphy, you'll hear from

goldman sacs. what about goldman here? capital markets have improved. no denying that. where does goldman figure in all of this? >> i think it's one of the names you want to look at and be long. if any of the banks pull back on earnings, jpmorgan down 5%, 6%, or a wells or goldman add to the position. either way whatever the reaction is to the earnings i think you'll get clarity from every single one of them. i think that's why the entire sector moves up from here. >> goldman makes a lot of money. mike's right. goldman makes a lot of money in markets like what we've had in the third quarter. this is probably where they knock the cover off the ball out of all the quarters of the past year. >> weiss, less than five minutes away from lloyd blankfein, simpson and bowles as well. our exclusive interview with steve liesman. what does wall street want to hear from these guys? >> it's all about the fiscal cliff at this point. what they want to know, simpson and bowles which was given the stiff arm by the obama

administration, are they warming up to them? they've been all three of them very frank, particularly simpson and bowles, do they think there's a chance of them being adopted into the process? can we avoid the fiscal cliff. >> being described by some as a ticking time bomb for stocks. that cnbc exclusive up next. we'll hear from lloyd blankfein, alan simpson and erskine bowles in just a few minutes when "halftime" comes back. n see that you're busy... but you were gonna help us crunch the numbers for accounts receivable today. i mean i know that this is important. well, both are important. let's be clear. they are but this is important too. [ man ] the receivables. [ male announcer ] michelin knows it's better for xerox to help manage their finance processing. so they can focus on keeping the world moving. with xerox, you're ready for real business.

all right. welcome back. as i said, we're just moments away from our exclusive interview with goldman sachs ceo lloyd blankfein along with erskine bowles and alan simpson. we'll get to that in a moment. we want to get you caught up on what's happening on wall street today. s&p 5 wur00, dow and nasdaq. attempting to rally. up much stronger than we are now. a little luster in the stock market has come off today. you had financials doing particularly well along with materials and energy. oil is up today. that's certainly helping the energy space. let's go now, in fact, to steve liesman. he joins us live from the goldman sachs headquarters with the interview. steve? >> scott, thanks for the half hour of your show. really appreciate it.

>> you bet. >> i am here with an all-star -- i'm calling it all-star trifecta. we have senator alan simpson. erskine bowles and lloyd blankfein of goldman sachs. we'll talk deficit, go inside washington and inside wall street for just about as long as they're willing to stay. gentlemen, thanks for joining us. erskine, you made a comment before we came on that said they didn't talk about the fiscal cliff or social security in the presidential debate. what does that tell you about the state of discussion about the issue of the deficit and the entitlement problems in this country? >> people are never going to understand how critical this particular time in history is. we have $7.7 trillion worth of economic events that are going to hit america in the gut in december. and in washington, they're doing nothing about it. nothing about it. we should be asking these guys running for president and every guy running for congress, what are you going to do? what kind of steps are you going to take? you know, if we do nothing, next

year you'll have the rate of growth slow to somewhere, like, 3% to 5%. unemployment go up another 2% to around -- above 9%. 2 million more people will lose their jobs. we're doing nothing about it. i can't imagine -- >> when you look at the horizon, the view of the economy, how serious is the fiscal cliff? how seriously do you hear washington taking the issue? >> i think it's very serious. i think -- i think the candidates know how serious it is. i think they're trying to avoid it maybe in part because it is so consequential and serious. and maybe that the ideas that would to be put forward would be unattractive to some people. obviously we're in a position where new discipline is going to have to be imposed. people are going to be disappointed in the consequence. i think they're going to avoid it. it takes a lot of courage to take on these issues. i think it's up to the media to really enforce this on to the candidates at this point. >> you just threw it back at me,

basically. >> frankly you could also say for the people who are the most aware of the consequences, namely people like ourselves who are advisers to companies who have to live in the economy, we sure know what the consequence would be. it would be awful. >> senator, if you are in a position now to be advising both candidates, what would you have them say now about the deficit. particularly in light of the vice presidential debate this evening. what would you like to hear from them? >> i think you want to tell them what a trillion bucks is. a silly exercise. let me tell you something about us, this country. spe if you spend a million a day since the worth of christ it wouldn't be the theory. the b-- start thinking. then you're going to borrow

3,60 3,600,000,000 a day. >> i want to stick with you, senator. is your criticism equal for both parties? is one of them worse? >> you bet. they're both in this. they worship the god of re-election. they're figuring all that and how to duck every hot issue before november 6th. then erskine says the whirlpool of 7 trillion bucks is going to hit us like a rainstorm. >> the fiscal cliff is obviously an important issue. if we don't get through this moment, there's going to be just a lot -- it's going to be horrible and what else i'm going to say may not even matter in the long run. assuming we get through the fiscal cliff, we have to get our budget on a sustainable path where it's predictable. in other words, we may get through the fiscal cliff by deferring it or by having something where in the long run it's not sustainable because our budget deficit will keep growing

wider and wider. in which case the people who have to make decisions won't regard it as a real long-term solution. what we really need to do is fix the economy of the united states on a sustainable basis so there's some predictability, to people don't stand on the sidelines, so they go and invest so jobs get created and it shall. >> let me stop you right there. are you saying hearing from clients when you look at what's happening now in the economy in the book of business you guys see every day, are people standing on the sidelines? is it something that's affecting the economy right now? >> oh, absolutely. the fiscal cliff specifically is one of the major ways in which the slow recovery that we have could be completely derailed. hard landing in china. euro collapsing. problems in the middle east. and fiscal cliff is probably paramount in that area. >> we just met with -- >> a dozen of the largest high-tech company ceos in the

country. not only are they hoarding cash. all their customers, all their suppliers are. they're scared to death we're going to go over this cliff and it could be a catastrophe. >> let me stick with you, erskine. simpson-bowles is not in and of itself going to solve the fiscal cliff problem. that is not the solution. if they enacted -- they can't enact simpson-bowles tomorrow, could they? >> let me just tell you what the fiscal cliff is. it's the expiration of the bush tax cuts. it's the expiration of the payroll tax. it's the expiration of a patch put over the amt so it wouldn't hit the middle class. it's these mindless, senseless across the board cuts that were put forth as a part of the sequester which came about because of the super committee. every one of those issues is addressed in a long-term fashion so it doesn't distract an economic recovery in

simpson-bowles. >> some people respond to fear. some people respond to opportunity. take it from the other side. what if we came up with a situation tomorrow, opened up a newspaper and there was some conciliation, there was some agreement, it may not be everything one side would want. somewhere in the middle. maybe closer to the extreme you didn't like. but there was some compromise that was laid out. what kind of a stimulus you think that would provide the economy? >> tell me your answer to that question. >> huge. >> how much would the market go up on that? >> i can't -- the market's a separate person. i'd be a buyer of the market. goldman sachs, we're not only advisers to companies. we're a company ourselves. we would be assuming our business would grow, that companies would be making more acquisitions, making more investments, that we would be doing more financings. we would have to get the people onboard to make sure that we were able to provide those advices -- those advice and those services. >> senator, real quick -- >> if they did a plan, they don't even have to go to our legislation. we've got it in legislative

language. if they just did a plan that was signed by democrats and republicans alike, it would be what we call the announcement effect. it would be tremendous. >> let's leave it there. we're going to take a quick break and come back. we're just starting to scratch the surface with our all-star trifecta. erskine bowles, alan simpson, and lloyd blankfein. a lot more topics to cover. we'll be back in just a little bit.

welcome back to our exclusive interview with senator alan simpson, erskine bowles of the bowles-simpson commission. and lloyd blankfein of goldman sachs. before the break we were talking about the negative implications of not solving the failure. what's the upside? >> the predicate of united states' strength and influence in the world is a great economy. we have a huge opportunity. there are a lot of things that have turned very favorable for us. demographics have turned favorable to us. technology industries that we're strong in. and most importantly and most unforseen, the energy situation in the united states. so getting -- it's not just, you know, simpson-bowles and getting our budget in order is fine. there are other things like energy, too, which we have to sort out which if we do, we'll find the united states is in the best competitive position of anyone in the world and the best competitive position we've been in generations. >> erskine? >> the big problem we have is how do we get there? as long as we have this huge debt overhang, and as long as we

don't bring our spending under control or increase our revenue, then we're not going to have enough resources to invest in education, invest in high value additive research, to invest in energy or infrastructure. these are the problem areas that we have to face up to. you know, we spend twice as much as any other country in the world on health care. you know, health care is an enormous problem. it's growing at a much faster rate than gdp. second problem is defense. we spend more than the next 17 largest countries combined on defense. third we have a tax code that is inefficient, ineffective and globally anti-competitive. fourth, you know, it's social security. social security is $900 billion cash deficit -- cash negative over the next decade. we've got to face up to those four big issues. >> let me just be clear, though. the head of the imf, christine lagarde, was out the other day warning countries against too much austerity. >> right. >> also pointing out that

countries who have done better are those who had a little bit less austerity. is there a danger with what you're proposing that it's taken too religiously up front -- >> that's why we said we ought to phase it in over a long period of time. look at what they did in the uk compared to what we're doing. it's very similar. we were $1 of revenue and $3 of spending cuts. we wanted to vote for a cost benefit analysis for all the programs we do. we raised the retirement age. they raised the retirement age. we control the rate of growth of health care. but they're trying to get to balance in five years. that was too much too quick. we recognize that. what we want to do is phase ours in over a much longer period of time. >> senator, it's hard to look at a 1.6% yield on the 10-year right now to see the money that floods into the u.s. treasury market any time there's concern about anything in the world and say, you know what? the deficit's the big problem right now. >> well, we're the healthiest

horse in the glue factory. because the trajectory of debt and deficit and interest in this country -- >> erskine, do you really say that? or is that a simpson original. >> i've tainted him. slowly over these last three years i've tainted him. anyway, the trajectory of debt, deficit and interest in this country is exactly the same as the pigg countries. except we're lots bigger. and we -- you know, all i know is this. there's a tipping point. i don't -- you don't care about whatever, you know, the big business world. he's the numbers guy. i do the color. the tipping point is when the people who loan us money say you're addicted. obviously you're $16 trillion. we're going to loan you more money but we want more money for our money and interest rates will kick up. and inflation. and the guy who gets hurt the worst is the little guy. >> i want to get your take on this. 1.6% 10-year yield. are people -- are businesses concerned about the fiscal cliff, or are they really

long-term concerned about the deficit? >> people lending money to the -- listen, would you lend money at 1.6% for ten years with someone with the character risks and credit character risks of the united states? of course not. trade is conducted in dollars, pools of dollars. they're financing us. they're financing us with enthusiasm until the day they stop. they don't -- they don't blow a horn ten minutes before that happens. we have to get ourselves -- we have to get ourselves in gear. >> does goldman take action right now to prepare for that music -- for the music stopping? do you protect yourself from that? >> yes, of course. we live in -- we protect ourselves from much lower -- from very, very tiny -- from very tiny probabilities. that's not -- there's a lot of things in the world. we think. we have reason -- we're optimistic about a lot of things. but we live 98% of our time in the 2% worst possibilities. that's what we plan and prepare for. let me just say on the last point, we -- we don't have a lot

of room for maneuver when our budget deficit is so big to play keynesian and spend a lot more now. at the same time you don't want to have austerity tomorrow at a time when deficits -- worried about deflation. there are some things from a fiscal point of view if they're not free, they're cheap. phasing in tax raises where you don't have to have another vote down the road. phasing in caps on entitlements down the road where they don't become implemented in the short term. getting rid of some regulations and rules that are impairing people from investing vast pops of liquidity that are on the sideline that are not owned by the government that are theirs to invest but they're just sitting on the sideline. >> the reason we have to do it, steve, let me just give you the very simplest arithmetic. if you take last year, not 20 years ago or 20 years from now, but last year. 100% of the revenue that came into this country was spent on what's called our mandatory spending and interest and debt.

mandatory spending is principally what we spend on medicare, medicaid and social security. that means every dollar we spent last year on these two wars, national security, homeland security, education, infrastructure, energy, homeland security, every single dollar was borrowed. half of it was borrowed from foreign countries. >> do you like the romney litmus test that he's going to take every program and see if it's worth it to borrow money from china? >> that's a fun way to say it. i think you should do a cost benefit analysis on all the money you're spending. let me give you an example. i ran a university for the last six years. i wanted to see if we could find a program to improve the quality of teacher education. we did. we found 82 of them. do we need two or three good ones? you bet. we don't need 82. >> senator simpson, there are some republicans who think we can get where we need to go without raising taxes. some democrats who think we can get where we need to go without

really substantially cutting entitlements. are both of them wrong? is one of them right? >> there are really not some. there are a lot of them. you have a situation where grover norquist has obtained this pledge in the '80s, the early '90s. he got this pledge he wouldn't raise taxes under any circumstances unless there's commensurate spending cut. those guys are enthralled to him. there are 82 guys in the house who didn't come to run the government. they came to stop it. you've got the lefties saying if you touch anything in health care or -- call it anything. you're throwing old ladies off cliffs in their wheelchairs. then you've got the republicans. but you don't have to raise taxes. you go into the tax code and you rip around -- the american people. only 27% of the american people

itemize. if you want to know about a stimulus, like whether you're listening to krugman or whoever, we do a pretty good stimulus. it's called the deficit. 1,100,000,000,000 bucks. what do you think that is? >> you can't solely tax your way out of it. raises taxes doesn't do a darn thing to change the demographics of a country. or the fact that health care is growing at a faster gdp. you also can't solely cut your way out of it without hurting the truly disadvantaged or without making such significant cuts in education and infrastructure, energy and research that we're not competitive in a knowledge-based global economy. >> i want to ask you, because a lot of this is predicated -- >> can i say one thing on that? >> yeah. >> even if it was a matter of economics you could live life on one extreme or the other. as a matter of political reality you can't. the country is divided on this.

whoever wins the election i hope they realize that you have to bring the entire country with you. you have to do this in a bipartisan way. or else we're going to be a very volatile system as we go from one extreme to the other extreme as the parties trade tenures in office. whoever does this is going to have to do something more in the middle just so the whole country can form a consensus and go forward. i see with these two gentlemen here you have such a great bipartisan spirit. after the election is over, whichever way it's resolved, i hope everyone takes that as a referendum that these questions are decided and that the winning party is generous enough and wise enough to realize you better take the other side with you. >> let me be clear about something on your personal view. if somebody comes to you and says, lloyd, you need to pay 5% more on your -- on your income taxes. in order to solve the deficit. are you in favor of that? >> of course. let me use my formulation. if you paid 5% more, you would solve the problem in a

heartbeat. i don't know anybody who wouldn't pay that kind of price to benefit the -- our country. the questions that come up are people going to -- the pressure that's put on people who would otherwise advocate tax raises, how will you spend it? will spend it and will this defer the hard choices that have to be made down the road. no one is soun pay t unpatrioti they wouldn't contribute a little more to resolve it. >> you shouldn't pay 5% more unless you are also willing to take some cuts in the spending side. we got to put the fiscal house in order and just paying more won't get us to the promised land. >> if you can't learn to compromise an issue without compromising yourself, you sure shouldn't be in congress. in fact you shouldn't even get married. if you can't learn to compromise, you shouldn't be in your business or his business. >> you shouldn't go to congress needing to learn to compromise. politics is the -- the definition of politics is the art of guesting things done. you should be elected for being willing and being able and capable of compromising in the first place. just think of the pressure that

was put on rahm emanuel in chicago for letting that teacher's strike go on for days. could you -- i mean look at the pressure that was brought to bear on the unions, on the government. look what we have at stake here in washington for the whole country. don't you think a little bit more pressure should be put on achieving a compromise? >> lloyd, i want to stick with you because i want to ask you. a lot of the outcomes we're talking about here are predicated on economic outcomes. give us your view of the u.s. economy and how concerned you are about what's going on globally in the economies. >> i think there is a lot of issues in the world today and a lot of opportunities. i think for one thing, a lot of the context that drove the credit bubble in some way and led to overleveraging created bad values but still are intact. for example, you think of the demographics around the world, creation -- wealth creation in china. they may have a bad year but they're not going to have a bad

century in china in terms of wealth creation. think of technology, other advances, the energy situation. i'm very optimistic in the long term and there are problems in the short term. i mentioned china. i think that works through but it might not in the short term. i feel more comfortable about the next five years than the next five months or the next year-and-a-half. i think europe looks much better than it did six months ago but they have a lot of wood to chop but i will tell you, the big shock of a derailment of the euro i think the official said it is a good job, not taking it entirely off the table relieving some people's short-term concerns as they muddle through. the united states actually i think has some of the greatest blessings around except that -- look. all the other problems in the world are real structural issues. china, the structure of the euro. in the united states, a lot of our problems are self-inflicted and could be self-resolved. and by the way, it makes the

long-term consequence in the judgment of history a lot more severe if we don't solve these resolvable problems. >> sticking with you one more question here, lloyd. to listen to the situation as laid out by misters bowles and simpson, you wouldn't think we'd have a stock market at an all-time high. if things are in such bad condition, why is the market as it is? >> for one thing, interest rates are so low that people are looking at equities as a high-yield asset class. people are looking at dividends that are much higher than the 10-year government bond rate. that's one thing that's fueling it. i think you also have -- >> you advise caution on that? >> i advise caution on everything. how -- not only do i advise it, i try to demonstrate it. >> i think the market's actually priced in that we're going to actually get a deal. they don't believe we'd be stupid enough to go over this cliff and have this economic crisis.

>> is that how you would bet, erskine? >> no. i'm really worried that if we don't get these guys to pull together rather than pull apart, that we face not only the most avoidable economic crisis in history but we face the most predictable. >> is that your bet though? what is your bet? >> i think we got about a 30% chance to get this thing done before the cliff. i think we got about a 30% chance to get it done immediately thereafter. and we got about a 30% to 35% chance that we won't get it done at all. >> doesn't forget another antipat antipathy. a politician doesn't like or believe the business people and the business people don't like or believe the politician and that's historical. i mean that's the way it works. i don't know what's going to happen but i tell you, i think there are just roses out there in the stock market. they can borrow money for nothing. the stock market, as lloyd says, money, the return, the yield, cash all over the place, and it's like the grass hopper and

the ant. only my grandmother remembers that. but i tell you, the industry -- the guys who are working and putting to the side are going to make it and the guys just whistling around like i think in the market -- i'm not here to dampen that, but holy smokes, they really believe honestly that no congress could be this stupid and, by god, they can. >> one other thing on the stock market. you also have the fed, you understand, who's basically saying there's a penalty for holding cash and they're engaged in a policy to take up asset prices, and it's kind of ironic that money is leaving the equity market now and going into fixed income markets with these very low rates. people may, in a bit, look back and wish they'd done the opposite. >> lloyd, there's a school of thought that what the fed is doing, buying treasuries, enables the deficit spending that's going on in washington. do you subscribe to that? >> in part, of course. in other words, if people -- anybody who -- >> should the fed stop for that reason? >> i think the fed is being very

aggressive and i think courageous in doing what they can. there's very little monetary tools left but they have a mandate and they're deploying all that they have. but there's nothing that will allow the fed to compensate for a total a total anbdication of responsibility. >> what would happen to the total debt burden if, a, the fed stepped out, and, b, if interest rates normalized? how much lower is it now than it otherwise would be if we were a 3% -- >> i'll give you the greatest example. we're spending $230 billion a year on interest right now. if interest rates were at their normal level, median level we were in the 1990s, or the first decade of this sently, we'd be spending $650 billion on interest alone. >> are you in a position to give

those numbers to the president of the united states if you're treasury secretary? >> no, i don't. >> you don't want the job or don't expect to be asked? >> i expect to be living in north carolina for the rest of my life. >> you can do the job from there, couldn't zmu. >> if they'd move the treasury to north carolina, that would be great. >> you didn't ask, but i'll pass on the job as well. >> count me out. he does the numbers. i do the color. >> lloyd, wall street, what's going on? m and a volume not doing so good. this is a fascinating fact that i looked up. when you did your ipo, you said a 40% return on equity. now it's 5%. what's the right number? >> i don't remember 40% return in equity. by have to let things sort out as between the opportunity set and regulation and amount of capital. how much equity in your returns, that's not sorted out yet. we have to see how that evolves.

i'd say for wall street the things that wall street do contribute to growth but they're also dependent on growth. we advise companies who want to do transactions. we finance transactions. we help people manage risky assets. we hedge people who do economic activity. in a period of time when economic activity is slow, guess what? we're going to be slow, too. as that speeds up, we'll speed up generally as some multiple of that change. >> there is a book that's coming out. i think you are familiar of this book coming out by an executive who used to work at goldman sachs, greg smith. how concerned are you about what revelations might be in that book? >> i'm not really concerned about the revelations. i tell you, i'm not looking forward to the hoopla around it if the hoopla that greeted his op-ed is any indication. but there's not a lot in it to begin with. i haven't seen the book and i haven't talked to greg -- in fact i never spoke to greg smith, but we went offense everything like crazy. there weren't real sharp

accusations. there were soft things like culture and things like that but we surveyed his own reviews and what people said about him and what he said about everybody else and, frankly, we could find nothing. we had to report this to our board. we're a highly regulated company. regulators were interested in this stuff and we still found nothing of real consequence. we'll take it. guess what? when you think about what's gone on the last four, five years, it will just go into the mix. >> i want to come back to some of these issues. i do want to ask senator simpson, would you tell me, if you had the opportunity to talk directly to candidate romney and candidate ryan, what would you want them to say? what would you advise them to say? what do you want to hear from the candidates in your own party when it comes to this issue? >> i think romney's right on track when he starts to say i know how to govern. and you govern by talking with the other side. and when he said during the debate that he was the